The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

What’s bothering our next generation of leaders?

The latest Deloitte Millennial survey shows that Australian millennials remain uneasy about the future, more so than their global counterparts. Just over a third (39%) believe they will be better off than their parents (compared to 51% globally), and only 35% believe they will be happier (compared to 43% globally).

A large part of that gap is driven by high housing costs, a stubbornly high youth unemployment rate that’s well above the national average (12.5% compared to 5.6%), and uncertainty about the future of work given the rise of the gig economy and rapid technological advances.

Perceptions of business are declining

Worryingly, Australian millennials’ opinions of the motivations and ethics of business and politicians is at its lowest level in four years (Figure 1). Less than half (45%) believe business has a positive impact on society, down from 72% in 2017, while nearly two thirds (63%) believe political leaders are having a negative impact on society. This suggests that a significant group of our workforce feels business is placing too high a premium on its own agenda without considering its contribution to society at large.

Figure 1: Millennials’ perceptions of businesses

Flexibility and a positive work culture are key to millennial loyalty

So the message for employers would appear to be clear: Australian millennials believe workplace culture is more important than just the money. When choosing an employer, 67% rate a positive work environment as the most important consideration (compared to 52% globally), followed by financial rewards/benefits (63% in Australia and globally). Flexibility is ranked as third most important (by 55% in Australia and 50% globally).

Millennials’ loyalty to their current employer has consistently been low. Almost half (44%) expect to stay with their employer for less than two years, while only 22% say they plan to stay beyond five years. And diversity, inclusion and flexibility are the key things employers should consider to keep millennials happy and loyal.

Another key concern of millennials is the impact of technology on the world of work. When asked about the impact on their jobs of ‘Industry 4.0’ (the fourth industrial revolution, characterised by the marriage of physical and digital technologies, such as artificial intelligence, robotics, cognitive computing and the internet of things), 45% said it would augment their job, while 18% said it would take part or all of their job’s responsibilities. They also believe it’s up to business to prepare them for this workplace of the future.

Figure 2: What attracts and retains millennials in the workplace

Given millennials are the business, political and public sector government leaders of the not-too-distant future, listening to this group, and understanding its thinking and concerns will be increasingly important for Australia’s future.

UK economic briefing by Ian Stewart

A week ago, we seemed to be on the verge of a second euro crisis with a populist mood threatening to sweep Italy out of the single currency. By the end of the week a coalition government was in place, the markets had cheered up and the newspapers were worrying about other things.

The market’s twin fears – of a Eurosceptic, Paolo Savona, being appointed as finance minister and of an early election which might have ended up as a referendum on the euro – have been averted. An Italian exit from the euro, a “Quitaly”, looks much less likely now than it did a week ago.

The scare has passed, but the underlying causes of last week’s turmoil remain, and with it the potential for further euro crises. Last week’s events highlight the problems of running a single currency across diverse, sovereign nations.

They include some of the richest and poorest countries in the developed world. GDP per head in Denmark for instance is three times higher than in Greece while Denmark’s unemployment rate is one sixth of Greek levels.

Such differences means that a single interest rate and exchange rate will not be right for all member states all the time. So, in early 2011 the Greek economy was a staggering 10% smaller than a year earlier while, German economy was booming with an annual growth of over 5.0%. The policy needs of the Greek and German economies were completely different. Instead they had the same interest rate and exchange rate and, in theory, the same rules for controlling government borrowing.

The Greek crisis showed how sustained economic weakness in one member state fuels tensions with the euro area and its dominant member state, Germany. These tensions were on display last week, with the European Commission president, Jean Claude Juncker, reproaching Italy, saying it needed “more work, less corruption, seriousness…don’t play this game of loading with responsibility [on] the EU”.

Last week’s crisis abated with two radical, populist parties, the Northern League from the right and the Five Star Movement from the left, forming an improbable coalition. Some Italian politicians play up their reservations or outright hostility to the euro, but it is hard to detect serious appetite among the Italian public for leaving the euro. The real point of difference with the European Central Bank (ECB) and Germany is that many Italian politicians want to be able to borrow and spend more and believe the ECB should to do more to support troubled banks.

Germany fears that it would foot the bill for such policies, exposing Germany to instability, higher borrowing costs and the risk of having to bail out other governments. For German policymakers the solution to Italy’s problems lie in economic reform and improved competitiveness – matters which are squarely in the hands of the Italian government.

Germany wants Italy to sort itself out. Italy’s populist parties seem to want looser rules for borrowing and for Germany to assume a bigger role in ‘risk sharing’ (which means Germany being more exposed to risk in other member states).

This is the big divide within the euro area, one rooted in the hopes that attended the birth of the single currency and the experiences of different member states since 1999.

The architects of the euro saw it lowering barriers to trade, speeding integration and raising Europe’s growth rate. By handing control of interest rates and the exchange rate to the ECB, national governments would no longer be able to resort to devaluation and inflation to boost competitiveness. They would have to get to grips with the inefficiencies and failings of their own economies.

Germany embraced reform, most notably with a sweeping set of controversial changes to labour market regulations in the early 2000s. Successive German governments have kept a tight rein on public spending and debt. In Italy, economic reform has been more modest and public borrowing has soared.

The period of euro area membership has been a good one for Germany, less so for Italy.

Since the inception of the single currency in 1999 German’s economy has expanded by 30%, Italy’s by 8%.

Successful labour market reforms have helped Germany to move from 14th to 5th position in the World Economic Forum’s Global Competitiveness League table. Italy’s ranking has fallen from 39th to 43rd place.

German unemployment has more than halved, to just 3.6%, since 1999 while Italy’s remains at 10.9%, the rate at which Italy entered the single currency. Despite a marked acceleration in euro area growth, youth unemployment in Italy stands at 32%.

Government debt account for 60% of Germany’s GDP, a figure unchanged since 1999. Italy’s has risen sharply to 130% of GDP, the third highest, after Japan and Greece, amongst 34 OECD economies.

Italy today has the lowest growth potential of any major EU economy. A surge in debt-funded government spending, as the new coalition wants, would boost activity, but it’s hard to see it improving long term growth prospects and it would play very badly with nervous bond investors.

The German and Italian positions are very different, as are their experiences in the euro. So what happens next?

If Italy’s new coalition enacted its earlier commitments in full public spending and debt will surge. Italy is already running a debt to GDP ratio of 130%, way above the 60% ceiling set by the euro area rulebook. This rule has been so frequently broken, at least 165 times since 1999 by several countries, that it has lost much of its bite. If Italian debt levels shoot up, pressure from financial markets, rather than enforcement action from the EU and the ECB, are likely to act as the real discipline.

Germany and Italy want Italy to stay in the single currency. But they have different views about how the euro area should be run. The German response to President Macron’s proposals for greater integration and risk sharing in the euro area, so far, has been cautious. Without a more cohesive euro area there will be more ups and downs of the kind we saw last week over Italy.

OUR REVIEW OF LAST WEEK’S NEWS

PS: Last Friday, the US levied tariffs on imports of steel and aluminium from the EU, Mexico and Canada with all three announcing they will retaliate. Professor Greg Autry, a strong supporter of Donald Trump, pointed out that China sets the global price of steel, producing over half of the world’s output. As steel is bought at a global spot price regardless of its origin, any US action on China involves insulating its domestic steel industry from the global market, which also makes Europe, Britain and other US allies inadvertent victims of the tariffs. Separately, the Trump administration announced more measures targeted at China, most notably 25% tariffs on $50bn worth of Chinese exports.

The FTSE 100 ended the week down 0.5% at 7,702.

International economic briefing by Ian Stewart

Economics and business

The OECD forecast global growth to pick up this year and expects the first-quarter slowdown in developed economies to be a blip

US regulators began an easing of the Volcker Rule, which bars banks from high-risk activity and was put in place after the financial crisis

The US unemployment rate hit an 18-year low in May as wages rose by 2.7% and the economy added 223,000 jobs, beating expectations

Euro area economic sentiment fell in May, reducing expectations of a bounce in euro area activity after a weak start to the year

Euro area inflation jumped to 1.9% in May from 1.2% in April

The UK Financial Conduct Authority called for a “radical overhaul” of high-cost credit saying the charges on overdrafts need “fundamental reform”

The number of workers that went on strike in the UK last year fell to its lowest level since the 1890s

UK consumer borrowing recovered in April to £1.8bn from £0.4bn in March

UK consumer sentiment rose in May due to improved personal finances, though the view on the economy remained downbeat, according to Gfk

The IMF expects China’s economic growth to moderate to 5.5% by 2023, a marked decline from the 6.9% growth in 2017

The US yield curve, widely seen as a key indicator of future activity, is giving its most negative signal on US growth for ten years

The uptake of electric vehicles could lead to a global tax shortfall of $92bn by 2030, through reduced taxation of petrol and diesel, according to the International Energy Agency

India retained its position as the world’s fastest growing large economy, growing at 7.7 per cent on an annualised basis in Q1

US regulators added Deutsche Bank’s US subsidiary to its list of problem banks which have weaknesses serious enough to threaten their survival

Brexit and European politics

The centre-right Spanish prime-minister, Mariano Rajoy, lost a parliamentary vote of no confidence and Pedro Sánchez, the Socialist opposition leader, was voted to be his replacement

The European Commission (EC) proposed to shift €30bn in EU funding away from central and eastern Europe to boost support for Greece, Italy and Spain

The EC proposed to create a European Investment Stabilisation Function, a €30bn loan plan to help euro area countries affected by economic shocks

The UK government confirmed it would not seek a second Brexit transition period beyond December 2020

Pessimism about Brexit is strongest amongst business leaders of the UK’s most productive companies, according to a Bank of England survey

Europe’s largest industrial companies warned that “the attractiveness of the UK for investments is very, very low” due to ongoing Brexit uncertainty

And finally…

Members of European Parliament (MEPs) will compete in a rap battle in an attempt to engage younger voters during June. The event, titled ‘Battle 4 your vote’ has been labelled “the coolest event ever”, and will involve MEPs joining forces with professional hip hop artists to battle for votes – (ME)P Diddy

David Rumbens is a Partner within Deloitte Access Economics. He is a macroeconomist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labour market analysis.

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at M...

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